Thread: CFTC plus NFA: End Of Hedging?

NFA has received notice that the Commodity Futures Trading Commission has approved new NFA Compliance Rule 2-43 concerning forex orders. The prohibition on carrying offsetting transactions will be effective for any places. The prerequisites regarding price adjustments will become orders executed after June 12, 2009.

Offsetting Transactions

New Compliance Rule 2-43(b) requires an FDM to offset positions in a customer account on a first-in, first-out foundation, therefore prohibiting a trading practice generally referred to as #8220;hedging. #8221; A customer may, however, direct the FDM to offset transactions that are same-size if there are transactions of a size that is different. Rule 2-43(b) is effective for any places based after May 15, 2009. Offsetting positions that were established prior to the effective date don't have to be liquidated, but after either position is closed out after May 15, it may not be reestablished as a scam.

You can read more about the news in these types of links:

http://www.nfa.futures.org/news/news...ArticleID=2273

http://www.nfa.futures.org/news/PDF/...Adj_112408.pdf

On May 15 the National Futures Association (NFA)
will implement a new rule, approved by the CFTC
in April, banning FX traders from holding opposing rankings
at precisely the same currency.
For traders using most U.S.-based FX traders, this
implies they will no longer be able to use a technique known
as”hedging,” or taking an equal but opposite position in a
currency when price moves against your primary trade,
instead of leaving the position and taking the loss. After
May 15, offsetting trades will cancel each other out on a
first-in, first-out (FIFO) basis.
In its letter to the CFTC indiing the shift, the NFA
stated there are two reasons it suggested the rule. ”First, [carrying
offsetting positions within an account] basically eradies
any opportunity to profit on the transaction.”
However, the Dollar is frequently used since it also eradies
the opportunity for further losses. The NFA's second reason
is holding two opposite positions raises the cost to the
customer. Having this type of hedge position, a client pays
twice the commissions due to the two separate trades.
Additionally, according to the NFA's correspondence,”a FX customer will
cover the whole spread twice (buying in the high end of the
spread and selling in the low end) instead of paying half
on entry and half on exit.” Increased carrying charges when
a standing rolls when held immediately add to the price as
well.
All of these prices are to the benefit of the dealer as well as also the
detriment of the client. Part of the NFA's defense for its
rule is that it feels traders could encourage it into unwitting customers
in an attempt to produce extra profits of the
raised prices. The NFA also claims the clinic could be
used to generate income by using the carrying fee to
accept intentional losses.
The NFA's letter cited pros and cons introduced to them
through comments received on the proposed ban before it
was approved.
But as recognized by the NFA, FX brokers
initially began offering the choice of holding two opposite
rankings, and in some cases advertising its availability,
due to client demand. Many of the dissenting voices
have stated the NFA has no business dictating what egies
a trader can utilize.
Some commenters recognized the fact that the method
incurred greater costs, but said this could be taken
care of if traders counted the trade as a single position when
calculating interest rates. According to the NFA's letter,
”In fact, a minumum of one commenter appears to suggest that NFA
must require this therapy.”
One major FX dealer said the change has much larger
impliions regarding order-handling technologies, and will
demand the alteration of their firm's whole trading platform.
”I do not think they understood just how much time it will take traders to
fix their platforms to comply, along with eduing that our
customers on the new ways of handling their risk,” stated the
spokesperson.
Other issues
Aside from the change regarding offsetting positions, the
NFAhas also put stricter limitations on the way and when traders
are permitted to change order prices after they have been
implemented and reported to the client.
Changes are usually attributed to Internet mistakes, erroneous
data feeds, and other technical mistakes. On the other hand, the
NFA discovered that the majority of the mistakes were directly related to
systems beneath the dealer's hands. The NFA decided traders
must”bear the burden” of those price changes, and therefore are
just permitted to make changes as it's to the benefit of
the client, or when the dealer operates a”straight
through” support (one which is totally digital and
provides direct access to a counterparty), along with the straightthrough
dealer receives bad data from the counterparty. In
this case, the dealer has 15 minutes to inform the client of
the change in case they opt to cancel or adjust the order.
This change takes effect on June 12.

New rules are about to go into effect from the Forex market; just how will you be affected by these changes?

This is from the NFA, dated April 13, 2009:

New Compliance Rule 2-43(b) needs an FDM to cancel positions in a client account on a first-in, first-out basis, thereby banning a trading practice generally known as hedging. A customer can, however, direct trades to be cancel by the FDM even if there are elderly transactions of a different size. Rule 2-43(b) is effective for any positions established after May 15, 2009. Offsetting positions that were established before the effective date do not need to be liquidated, but once either position is closed out after May 15, it may not be reestablished as a hedge.

Http://www.nfa.futures.org/news/news...ArticleID=2273
http://www.nfa.futures.org/news/news...ArticleID=2273
What does this mean to you? The NFA is prohibiting the practice of establishing a long and short position on a currency pair, popularly known as hedging. Forex brokers (known this as FDM's, or Forex Dealer Merchants) have enabled this practice for years, which may be useful under the proper circumstances. For instance, suppose that a trader will be bullish EUR/USD at the very long term, but is bearish about the currency pair in the brief term. A trader could maintain a long position and a position in EUR/USD simultaneously. The NFA is concerned that brokers have found a means to permit traders to set up a flat position while charging two commissions. This may no longer be allowed as of May 15.

You're about 10 threads and a month Overdue

I am bothered by this decision as much as every other FX trader. I recently opened a account with a firm and now cannot exchange my egy. Since, this decision I have been searching around for a new currency trading broker and have heard that traders are able to continue to market with ACM. I received a response within an hour informing me about the feature they still can provide in from their customer service. Hedging can be offered by ACM, since they are Swiss-based and are in the process of becoming a Swiss bank.

Yes, this new rule is dumb, especially because it achieved nothing but to roil the market. Difficult to believe that the misinformation and obvious speculation which surrounds it. Not overly impressed with the folks at NFA.

Unfortunately, so-called payoff is much dumber than the principle. It is a misnomer. Because a hedge fund would take action this is not hedging. It needs to be called a Freeze. That's what you are doing when an place start. You've frozen your original place and are from the MARKET. Whether you are down 50 or up fifty, makes no difference. You cannot salvage a losing place through this so-called hedge. One side going up, the other down.
Finally you'll have to eat it.

The biggest problem however, is opportunity price. As you're frozen, the market moves
400 pts, either way, in spite of the fact that you're fat, DUMB, and happy. You're marvelous hedge does not look so hot now.

Ahhhhh-ha NFA rules huh.

What a BS!

If so, why not we open two accounts and placing buy order and sell order in different account.

I think NFA never thought about that did not they? LOL

problem solved.

Originally Posted by ;

Ahhhhh-ha NFA rules huh.

What a BS!

If so, why not we start two accounts and setting buy order and sell order in different account.

I think NFA never wondered that didn't they? LOL

problem solved.

Yeah what a BS they didn't think of the ahhhhhh-ha LOL, that is the reason why they said....

....The proposed rule wouldn't prohibit customers from pursuing short-term and long egies in separately margined accounts....


Would not it be a Fantastic idea to Really read the principle before trying to comment on it

Originally Posted by ;

Maybe in a brief time we will hear rumours that NFA is considering banning automated trading because it isn't profitable. Again, they'll be protecting us from ourselves (or by our robots, lol). What a joke these bureaucrats are...

....or maybe NFA could introduce a new rule which makes it mandatory for brokers to put customers through a'suitability test'. Maybe the question may be If I Buy 100k EUR/USD and Sell 100k EUR/USD at the exact same time what's my net vulnerability. Going by some of those answers in those threads 7 out of 10 would fail!

On second thoughts scrap that, I figure that the money has to come from somewhere!

As far as banning automated trading moves, that rule already exists. I think most if not all exchanges have the authority to force institutions to switch off boxes should they announce that a'fast market'. I doubt they'll expand that to EA's trading FX micro lots so you are safe....for now

Originally Posted by ;

Yes, this new rule is dumb, especially because it achieved nothing but to roil the market. Difficult to believe the obvious and misinformation speculation that surrounds it. Not impressed with the people at NFA.

Regrettably, so-called hedging is even dumber than the principle. It is a misnomer. As a hedge fund will take action this is not hedging. It needs to be called a Freeze. That's what you are doing when an off-setting place open. You have frozen your original place and are OUT OF THE MARKET. Whether you are down 50...

Freezing the account is what you desire. It Stops the Bleeding! In the event of an unexpected tendency change or a serious retrace that you would like to stem the bleeding of your account fairness while you figure out how much trouble you#8217;re in. A hedge can accomplish this. With same account, same pair trades I have offset retracements and tendency changes back into profitability and not only salvaged my account but. I heard a lot about trading in the process, and a huge amount about the personalities of the pairs I had been trading.

You are correct that trading both sides of the fence is foolhardy, however a timely well placed hedge can save your account from the un-expected. In both instances the indiors along with the fundamentals explained my place #8217;s were correct, but there is one overriding factor I have heard about the way. Regardless of the indiors and fundamentals, fear will win out. If the market is fearful, it's irrational, and knowing how and when to place a market can save your ass and be more profitable.

Thanks for listening.